How to complain about poor DB lump sum commutation factor / inequality?

AlanP_2

itsmeagain said:

AlanP_2 said:

itsmeagain said:

hugheskevi said:

itsmeagain said:

Thanks but i'm not sure of the relevance of the DB members in different sectors/stages in the table?
For a DB scheme, my argument is that however you take your pension (early, late, with or without a lump sum), the factors should compensate to ensure all methods are fair/equivalent (assuming nominal death age etc). The factors should not be purposely abusive/penalising depending on how you take your DB pension. I thought that there may be a governing body to ensure a level of integrity, hence my original question.
Furthermore, the fact that some schemes are even more abusive to their members when taking a lump sum, doesn't make me happy at all!

The relevance is that if you make representations to the trustees that the factors used are unfair, they are under no obligation at all to do anything. However, if they choose to do something, that is likely to start with consideration of how their factors compare to other schemes. Upon finding they are already more generous it is unlikely they will take any action.

Similarly, any governing body (if one existed) would be unlikely to take any action against a scheme that already operates better than average terms - especially when it would be opposed by HM Treasury due to the public sector pension expenditure consequences.

This is part of a multi-decade debate. Employers have never been under any obligation to offer a Defined Benefit scheme. If they choose to do so, is it right that the State should regulate them beyond ensuring they deliver the contractual obligations they have entered into with members? Why should it be that one employer can choose to not offer any pension at all (prior to auto-enrolment) and that is fine, but if an employer chooses to offer more, the State then regulates what they have voluntarily offered to members. Many believe this is part of the reason for the decline of Defined Benefit schemes, with regulation increasingly removing discretion in provision, as statutory requirements for revaluation, indexation, preservation, equalisation, etc, were introduced over the years.

You can accuse DB and other pension schemes of many levels of unfairness, eg

• Why should level of tax relief an individual gets for making pension savings depend on whether their employer payroll offers salary sacrifice?
  
• Why should earners with income below Personal Allowance get basic rate tax relief if their employer uses relief-at-source method to make contributions, but not if their employer uses net pay?
• Why should younger members accrue benefits of lower value than older members in most Defined Benefit schemes?
• Why should the regulations that apply today around survivor benefits and pensions ceasing on remarriage, etc, not be made retrospective?
• Why should public sector schemes not have to offer comparable transfers values to private sector?
• Why shouldn't all DC schemes be forced to offer all modern forms of decumulation (drawdown, UFPLS, etc)?
  
• Why shouldn't charges be made the same across all schemes, given individuals have no choice about the scheme their employer uses, and the employer has no incentive to minimise costs, as they are paid by individuals?
  
• Why should some DB schemes have integrated DC AVCs enabling members to build up large tax free lump sums but not other DB schemes? Why not look at tax free lump sum entitlement across all schemes rather than at individual scheme level?

The potential for perceived unfairness is everywhere in pensions, so best not to dwell on them too much and just optimise your own arrangements around the rules as they are. Schemes are not compelled to use any particular factor beyond whatever may be said in the rules and their is no recourse unless you can think of a legal challenge to launch. Given your scheme already offers above average terms, it is unlikely any challenge will be successful.

I'm still not sure what the table had to do with the commutation factors but I agree with you wrt there being many other things across company pensions schemes that are inconsistent/unfair. However, I am talking about unfairness within a single scheme and I'm sure that there's lots of unfairness within other individual schemes that's unlikely to be sorted out. However, my scheme has just reluctantly improved their early retirement factors (at their cost). This may in turn require increased company or employee contribution, but at least individuals now have a fair reduction for claiming early. This is why I wondered if a similar principle could be arranged on the commutation factors too.
I bet that if I started a similar convo on here a year ago, requesting what I need to do to get my schemes unfair early retirement factors improved, most people would have given me similar answers to what they are currently saying on the commutation factors (no chance)!

Why do you say "reluctantly improved"? Are you one of the Trustees that was forced to do that or is the statement conjecture?

I would have thought that it more likely the scheme actuaries & managers keep an eye on the wider perspective and review things every few years. The actuaries views on what an equitable early retirement factor would be will be based on what is happening within the cohort covered by the scheme, with reference to schemes in similar employers / industries. The overall objective will be "cost neutrality" over expected lifetimes.

Improved factors could be as a result of worse life expectancy outcomes than anticipated for the typical employee! 

I'm just a member of the scheme with no special position of knowledge/control. Much of the info I know is by talking to the 'help line' and other members plus letters / articles on the scheme.

For me, if I took my pension at 55 using the old ERF's, I would be losing out from the age of 70ish, but with the new ERF's, I will be losing out after the age of 79 (by simply multiplying my pension by the number of years claiming). This change must have cost the scheme more than the old factors. They will be paying me £3k more (index linked) for the rest of my life as a result.

I have attached a pic of a communication they sent to me ref the improvements they have made to the ERF's which are now 'fairer' but there is no mention of commutation factors at this stage.

Which reinforces my point. You say "reluctantly improved" wheras in fact it followed the typical 3-year review process, and aims to "fairly reflect the cost of the option".

The trtustees are not like your employer that you might have to drag a payrise out of, they are there to represent employer / employees / pensioners and to run the scheme in an equitable fashion.

itsmeagain

AlanP_2 said:

itsmeagain said:

AlanP_2 said:

itsmeagain said:

hugheskevi said:

itsmeagain said:

Thanks but i'm not sure of the relevance of the DB members in different sectors/stages in the table?
For a DB scheme, my argument is that however you take your pension (early, late, with or without a lump sum), the factors should compensate to ensure all methods are fair/equivalent (assuming nominal death age etc). The factors should not be purposely abusive/penalising depending on how you take your DB pension. I thought that there may be a governing body to ensure a level of integrity, hence my original question.
Furthermore, the fact that some schemes are even more abusive to their members when taking a lump sum, doesn't make me happy at all!

The relevance is that if you make representations to the trustees that the factors used are unfair, they are under no obligation at all to do anything. However, if they choose to do something, that is likely to start with consideration of how their factors compare to other schemes. Upon finding they are already more generous it is unlikely they will take any action.

Similarly, any governing body (if one existed) would be unlikely to take any action against a scheme that already operates better than average terms - especially when it would be opposed by HM Treasury due to the public sector pension expenditure consequences.

This is part of a multi-decade debate. Employers have never been under any obligation to offer a Defined Benefit scheme. If they choose to do so, is it right that the State should regulate them beyond ensuring they deliver the contractual obligations they have entered into with members? Why should it be that one employer can choose to not offer any pension at all (prior to auto-enrolment) and that is fine, but if an employer chooses to offer more, the State then regulates what they have voluntarily offered to members. Many believe this is part of the reason for the decline of Defined Benefit schemes, with regulation increasingly removing discretion in provision, as statutory requirements for revaluation, indexation, preservation, equalisation, etc, were introduced over the years.

You can accuse DB and other pension schemes of many levels of unfairness, eg

• Why should level of tax relief an individual gets for making pension savings depend on whether their employer payroll offers salary sacrifice?
  
• Why should earners with income below Personal Allowance get basic rate tax relief if their employer uses relief-at-source method to make contributions, but not if their employer uses net pay?
• Why should younger members accrue benefits of lower value than older members in most Defined Benefit schemes?
• Why should the regulations that apply today around survivor benefits and pensions ceasing on remarriage, etc, not be made retrospective?
• Why should public sector schemes not have to offer comparable transfers values to private sector?
• Why shouldn't all DC schemes be forced to offer all modern forms of decumulation (drawdown, UFPLS, etc)?
  
• Why shouldn't charges be made the same across all schemes, given individuals have no choice about the scheme their employer uses, and the employer has no incentive to minimise costs, as they are paid by individuals?
  
• Why should some DB schemes have integrated DC AVCs enabling members to build up large tax free lump sums but not other DB schemes? Why not look at tax free lump sum entitlement across all schemes rather than at individual scheme level?

The potential for perceived unfairness is everywhere in pensions, so best not to dwell on them too much and just optimise your own arrangements around the rules as they are. Schemes are not compelled to use any particular factor beyond whatever may be said in the rules and their is no recourse unless you can think of a legal challenge to launch. Given your scheme already offers above average terms, it is unlikely any challenge will be successful.

I'm still not sure what the table had to do with the commutation factors but I agree with you wrt there being many other things across company pensions schemes that are inconsistent/unfair. However, I am talking about unfairness within a single scheme and I'm sure that there's lots of unfairness within other individual schemes that's unlikely to be sorted out. However, my scheme has just reluctantly improved their early retirement factors (at their cost). This may in turn require increased company or employee contribution, but at least individuals now have a fair reduction for claiming early. This is why I wondered if a similar principle could be arranged on the commutation factors too.
I bet that if I started a similar convo on here a year ago, requesting what I need to do to get my schemes unfair early retirement factors improved, most people would have given me similar answers to what they are currently saying on the commutation factors (no chance)!

Why do you say "reluctantly improved"? Are you one of the Trustees that was forced to do that or is the statement conjecture?

I would have thought that it more likely the scheme actuaries & managers keep an eye on the wider perspective and review things every few years. The actuaries views on what an equitable early retirement factor would be will be based on what is happening within the cohort covered by the scheme, with reference to schemes in similar employers / industries. The overall objective will be "cost neutrality" over expected lifetimes.

Improved factors could be as a result of worse life expectancy outcomes than anticipated for the typical employee! 

I'm just a member of the scheme with no special position of knowledge/control. Much of the info I know is by talking to the 'help line' and other members plus letters / articles on the scheme.

For me, if I took my pension at 55 using the old ERF's, I would be losing out from the age of 70ish, but with the new ERF's, I will be losing out after the age of 79 (by simply multiplying my pension by the number of years claiming). This change must have cost the scheme more than the old factors. They will be paying me £3k more (index linked) for the rest of my life as a result.

I have attached a pic of a communication they sent to me ref the improvements they have made to the ERF's which are now 'fairer' but there is no mention of commutation factors at this stage.

Which reinforces my point. You say "reluctantly improved" wheras in fact it followed the typical 3-year review process, and aims to "fairly reflect the cost of the option".

The trtustees are not like your employer that you might have to drag a payrise out of, they are there to represent employer / employees / pensioners and to run the scheme in an equitable fashion.

The union have been asking for many years to improve the ERF's and they have only just done it to "fairly reflect the cost of the option". The ERF's now do fairly reflect the option of retiring early but the commutation factors do not yet fairly reflect the option of taking a lump sum.
As i've said earlier - I expect that if this thread was written a year ago about improving ERF's - everyone would be saying similar things to what they are saying now!
I haven't said that I'm expecting them to jump at only my request and change the cumulation factors overnight. Another 3 years time would be great if it happened. I'm wanting to know how my voice and other members get heard and considered, even if that does mean in another 3, 6 or 9 years time?

jimi_man

Silvertabby said:

itsmeagain said:

Silvertabby said:

It's apples and oranges again.  In the case of DC schemes, both employer and employee pay in to an investment, which is then - by and large - at the mercy of the stock market.  A crash wipes out 20% of the fund overnight?  Not the employer's problem.  It's the employee who takes the hit.

With a DB scheme, however, regardless of what happens to the funds investments, the employee is guaranteed to receive a pension based on salary and service.  

It's the scheme actuaries who set the accrual rates (which differ even within the public sector), commutation rates, contributions, etc etc at a level which makes the scheme affordable.

This level of unhappiness against a commutation rate is unusual on these boards.  The biggest gripe seems to be the way DB pensions die with a fund member who doesn't leave an eligible partner and/or children, with one poster arguing that he should be able to leave a 'pension for life' to anyone he chose rather than 'waste it'.

The answer to that was that the scheme affordability was based on the fact that those who sadly die early help pay the benefits of those who live to 90 plus.  This has always been the way of DB schemes, otherwise they would be unaffordable and would either go the way of so many schemes before them - DC - or would have to decrease the accrual level and/or increase the contributions.

Similar reasons apply to commutation levels.  The actuaries have factored in that X number of pensioners will reduce their overall benefits by commuting..

However, there is a big difference between 'losing' benefits due to early death or by commuting at a poor rate.  It's your choice to commute or not.

I'm not sure that anything is relevant to the fairness of the commutation factor except "The actuaries have factored in that X number of pensioners will reduce their overall benefits by commuting.."
You are right. This is my exact point. The actuaries are using commutation factors to reduce the overall benefits to pensioners that take a DB lump sum. This is what makes it unfair. The lump sum choice should be fair and proportionate to the reduced pension and not penalising. They are taking advantage of people that want the lump sum or don't understand its poor value. I have chosen not to take the reduced pension / lump sum combination because it's not a fair swap for a full pension.

No, not 'unfair' - it's just the way it is.  I can only speak from LGPS experience, in that at least 80% of retirees take the maximum commutation despite the poor rate of 1:12, but expect that the other public sector schemes show similar results.

Can you just imagine the extra costs to the taxpayers if commutation could be offered without any penalties?

Agreed. I retired from the police and I was a rarity not taking commutation. I believe that over 90% take it. The rates were a little higher but not much. I was offered 21:1 or thereabouts, however I was 51 rather than 65-67, so in context with my age it's a pretty dire rate. 

Johnnyboy11

I'd be tempted to take the 1:12 commutation and hand the proceeds to Terry Smith to manage, rather that leave it with the LGPS and accept a derisory CPI increase.

AlanP_2

Johnnyboy11 said:

I'd be tempted to take the 1:12 commutation and hand the proceeds to Terry Smith to manage, rather that leave it with the LGPS and accept a derisory CPI increase.

Why? Do you guarantee that Terry Smith will generate say a 8-10% after fees return for the next 20-40 years?


EDIT - Make that a minimum 12.5% return as the (low) 1:12 commutation rate is the equivalent of 8.33% return and allowing for CPI at 2.5% would leave ~1.5% reward for the extra risk.

Thrugelmir

AlanP_2 said:

Johnnyboy11 said:

I'd be tempted to take the 1:12 commutation and hand the proceeds to Terry Smith to manage, rather that leave it with the LGPS and accept a derisory CPI increase.

Why? Do you guarantee that Terry Smith will generate say a 8-10% after fees return for the next 20-40 years?

One day will become a fallen star as Woodford has. Every investment style is cyclical. 

sandsy

The actuarial profession did a review on this recently, finding that "commutation rates are often well below transfer values, which may lead to poor value for members." See:

https://www.actuaries.org.uk/upholding-standards/actuarial-monitoring-scheme/thematic-review-programme/thematic-review-programme-reports

itsmeagain

sandsy said:

The actuarial profession did a review on this recently, finding that "commutation rates are often well below transfer values, which may lead to poor value for members." See:

https://www.actuaries.org.uk/upholding-standards/actuarial-monitoring-scheme/thematic-review-programme/thematic-review-programme-reports

Very useful thank you - the professionals seem to align to my way of thinking.
Transfer values have gone up with lowering investment returns but commutation factors are stuck in the past (not taking into consideration the reduced return rate from investing the lump sum).
Schemes are taking advantage of the fact that so many people still take the lump sum as the cheaper option for the scheme, effectively removing 1/4 of their liability for half the price that it would cost them long term.
So glad that I have an AVC to cash in, so don't need the poor DB lump sum!

Thrugelmir

itsmeagain said:

sandsy said:

The actuarial profession did a review on this recently, finding that "commutation rates are often well below transfer values, which may lead to poor value for members." See:

https://www.actuaries.org.uk/upholding-standards/actuarial-monitoring-scheme/thematic-review-programme/thematic-review-programme-reports

Transfer values have gone up with lowering investment returns 

Not strictly true. There's beeen a bull market in bonds (Gilts) for the best part of 50 years. Now's the window of opportunity to offload future liabilities.